LPL on course for 90% Commonwealth asset retention, CEO says

As LPL Financial nears its goals for retaining Commonwealth assets, the firm’s internal recruiters are finding more time to devote to pulling advisors from wirehouses and other industry rivals.

So said LPL CEO Rich Steinmeier in a call on his firm’s third-quarter earnings on Thursday. LPL has been under a microscope in the months since it announced plans in March to purchase its former rival Commonwealth Financial Network in a $2.7 billion deal.

LPL then said the economics of the deal were predicated on its prediction it would ultimately be able to retain 90% of Commonwealth’s then $285 billion in assets under management. So far, $275 billion has been brought in, helping to push assets held in advisory and brokerage accounts up 45% year over year to $2.3 trillion.

“We’re at that nearly 80% of assets having signed their agreement to stay with Commonwealth, on track for the 90%,” he said in response to an analyst’s question. “Putting all of that retention aside, we feel over the moon with this transaction, cultural alignment and complementary capabilities for creating a combined firm that is far stronger than the sum of the parts.”

LPL internal recruiters pivoting back to non-Commonwealth advisors

Steinmeier said internal recruiters at LPL have been devoting a great deal of time to helping Commonwealth advisors through the acquisition. 

“As we begin to continue to progress toward higher and higher percentages of the advisors who have made decisions to stay with Commonwealth, that does present us with the opportunity to bring back some of the recruiting and retention specialists that we had ring-fenced and allocated into educating Commonwealth advisors,” Steinmeier said. “That’s beginning throughout the second half of this year and will continue.”

LPL ended the third quarter with 32,128 advisors, up a net 2,775 from the previous three-month period. It was unclear how many of those gains came from Commonwealth, which had 2,900 advisors when the plans for its purchase were announced in March.

Steinmeier noted that the third quarter saw LPL pull some large teams with $1 billion or more under management from its industry rivals. In September, for instance, it announced its recruitment of Tennant Financial, a 10-member team that had previously managed $1.3 billion at Northwestern Mutual. That same month, it drew in Golden State Wealth Management, a group with roughly $1.6 billion in assets under management and $7.1 million in annual revenue production in Merced, California.

Steinmeier said that industry recruiting has been happening at a slower pace than usual. One bright spot for recruiting firms have been wirehouses, several of which have adopted unpopular pay policies in recent years.

“They just continue to get further and further away from market competitive,” Steinmeier said. “So you see more and more advisors, in increasing numbers, picking up their heads to consider their alternatives. I think that actually is a good trend for the independent segment, where you could see continued movement.”

The cost of absorbing Commonwealth and making internal upgrades

Many of LPL’s industry rivals responded to the initial news of the Commonwealth deal with aggressive recruiting offers seeking to entice Commonwealth advisors over to their firms. Competitors like Raymond James, Osaic and Cetera Financial Group have been making almost weekly announcements of teams successfully pulled over.

Yet, even as LPL executives gave little indication that their rivals’ recruiting has disrupted their Commonwealth plans, they did note some big costs tied to the purchase. The quarter, for instance, saw LPL log $419 million in one-time acquisition expenses.

Beyond that, LPL has been spending money on various internal changes to help Commonwealth advisors and staff feel at home. LPL executives have pledged to go out of their way to keep as much of Commonwealth intact as possible, including its brand and general ways of doing business.

Among other recent changes, Steinmeier said LPL is moving away from a system that had advisors working with individual client accounts and toward one in which they’re dealing primarily with client households. It has also introduced a mobile app version of its ClientWorks software used for opening accounts, trading and managing accounts.

“These are key capabilities that not only enable Commonwealth conversion, but also accelerate the delivery of core functionality for the benefit of all LPL advisors,” Steinmeier said.

Asset inflows from recruiting deals, outflows from OSJ losses

Expenses stemming from the Commonwealth acquisition helped drive LPL to a $30 million loss for the quarter. That red ink came despite the nearly $4.6 billion in revenue LPL logged, a figure up 46% year over year. That increase was driven largely by a 60% increase in revenue from advisory accounts, which came in at $2.2 billion.

Helping to bolster those fees were not only assets brought in from Commonwealth, but also advisor recruiting and other deals. LPL reported it added $33 billion from recruitment deals in the quarter, up 27% year over year.

LPL also brought in $17 billion in net new assets from its deal to provide various support services to the wealth management arm of Memphis-based First Horizon Bank. Offsetting that gain was the loss of $6 billion in client assets that left with the recent departure of two large advisory practices technically known as offices of supervisory jurisdiction, or OSJs. The OSJs Wealth Enhancement Group and Merit Financial Advisors both confirmed last year that they’re leaving LPL, taking about $20 billion in client assets with them.

Changes to advisory and brokerage account fees

LPL Chief Financial Officer Matthew Audette said the firm plans to increase its appeal to outside advisors in part by simplifying and lowering some of the fees collected on its advisory accounts. At the same time, it will increase various charges on its brokerage accounts to bring them more in line with fees charged by industry rivals.

“These actions are designed to strengthen our competitive position, while ensuring we have the resources to continue investing in platforms, tools and services that enable advisors to grow and succeed,” Audette said.